Deciding Between Buy Now, Pay Later and Your Credit Card: Making the Smart Choice

**Buy Now, Pay Later vs. Credit Cards: Which Payment Method Should You Use?**

**Explaining Buy Now, Pay Later (BNPL)**
When you reach the checkout counter, you often have the choice to pay with a credit card, debit card, or use a Buy Now, Pay Later (BNPL) service. However, if you’re unfamiliar with how BNPL works, you may be skeptical about its terms and whether it’s a good alternative to traditional financing options. Recent studies show that BNPL loans have gained popularity among consumers. According to the Consumer Financial Protection Bureau (CFPB), the number of BNPL loans originated in the U.S. by the top five lenders grew by 970% between 2019 and 2021. So, which payment method should you choose? Let’s take a closer look at the details.

**Buy Now, Pay Later – The Details**
BNPL platforms make it easier for consumers to finance purchases by breaking the overall cost into smaller installments. These installments can vary in length, ranging from a few weeks to a year or more. However, it’s important to note that BNPL loans often come with interest and fees. The specific terms depend on the platform, with some basing them on your credit profile and others charging a flat rate. When making a purchase, the merchant typically partners with one or more BNPL services and offers it as a payment option at checkout. Customers are then redirected to the platform’s website, where they can learn more about their financing options. The platform may use the customer’s information to perform a soft credit check, which does not affect their credit score, to determine approval, credit limit, APR, and more.

**Buy Now, Pay Later vs. Traditional Credit Cards**
BNPL services differ from traditional credit cards in several key ways. While BNPL platforms break payments into installments for specific purchases, credit cards offer a revolving line of credit for ongoing use. Additionally, BNPL services may only be available for certain purchases from participating merchants, whereas credit cards can be used anywhere credit cards are accepted. Credit cards also provide an opportunity to build credit, as card issuers report payment history to credit bureaus. This is not always the case with BNPL services, although some are beginning to do so. Another advantage of credit cards is the potential to earn perks and rewards like cash back or points, which can save customers money in the long run.

**Interest and Repayment Terms**
Interest is another factor that sets BNPL services and credit cards apart. When using a credit card, you can avoid interest on purchases if you pay the balance in full each month. In contrast, BNPL services may charge interest from the start, although some platforms do offer interest-free periods. However, this depends on the specific platform and its terms.

**Choosing the Right Payment Method**
If you’re unsure about using BNPL or a credit card for financing, consider asking yourself a few questions to make an informed decision:

**1. What are you purchasing?**
If you only need to finance a single purchase and don’t typically rely on a credit card, BNPL can be a convenient option. However, if you plan to finance purchases regularly or make larger purchases, a credit card might provide a higher credit limit and more flexibility.

**2. Are you working on improving your credit score?**
For customers looking to boost their credit score, using a credit card responsibly is often more effective. Many BNPL services do not report payment information to credit bureaus, so it won’t have an impact on your credit history. However, it’s important to note that BNPL services only require a soft credit check for approval, while applying for a new credit card leads to a hard inquiry.

**3. What is your repayment timeline?**
Credit cards offer more flexibility in terms of repayment, as there is no set time limit. Customers are only required to make the minimum monthly payment. On the other hand, BNPL services have strict repayment terms, which may suit customers looking for a longer-term financing solution.

**4. What are your approval odds?**
The approval rate for BNPL services is generally higher compared to most general-use credit cards. However, each credit card issuer has its own approval criteria, so even with less-than-stellar credit, you may still be approved for a credit card. It’s important to weigh the odds of approval for both options.

**5. Are you pre-approved for a store card?**
BNPL loans may offer fast approval with a lower barrier to entry. However, the interest rates on these loans can often exceed 30%. Retail cards, on the other hand, have an average annual percentage rate (APR) of 26.72%. While this is higher than general-use credit cards, it is significantly lower than most BNPL services. Retail cards also provide a longer repayment timeline and may offer discounts or rewards.

**The Takeaway**
Ideally, having the cash on hand to cover a purchase would be the best option, as it eliminates the need to repay an installment loan. However, if that’s not feasible, carefully consider the details and terms of BNPL services and credit cards before making a decision. Selecting the right payment method depends on factors such as the nature of the purchase, your credit score goals, repayment timeline, approval odds, and the presence of pre-approved store cards. By thoroughly evaluating these factors, you can make an informed choice that best suits your needs and financial situation.

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